LNG Oversupply? With Tech’s Ascension, There’s No Such Thing as Enough Energy
A few years ago, if you flew across North America on a clear day, preferably in an aircraft, you would sometimes see natural gas flares burning below you at ground level. Natural gas often is found in proximity to oil, so while the oil was extracted and transported for processing and refining, the natural gas was simply burned off and extinguished. As I said, you could see it from above, while riding in a commercial flight on a clear day, presuming you didn’t close the window blinds.
In recent years, I noticed that younger fliers tend to close the blinds, preferring digital distractions to nature’s scenic bounty. They’re missing a good show – not a lot of action or plot twists from moment to moment, but instructive all the same.
I can tell you authoritatively that there’s a lot to see out that window. One time when I was on an aircraft en route to China, while over eastern Russia, I saw a couple Russian fighter jets speeding across the horizon a few thousand feet below our commercial flight. Reflexively, in the excitement of the moment, I blurted, “Wow! There are two Russian military aircraft underneath our plane!” At that point, after some commotion and consternation among the other passengers in the cabin – I believe I heard some audible gasps – I was brusquely advised by a flight attendant to promptly pull down my blind and keep my observations to myself. So much for remaining alert to one’s surroundings.
That digression aside, and getting back to the business at hand, I thought to mention my observations from altitudes of 37,000 feet because natural gas, now that it is being extensively liquefied and transported to markets for widespread use, is prominently featured in recent news.
For starters, the U.S. government has committed to the maintenance and modernization of natural-gas pipelines, according to a Reuters report. The cost of the initiative is less than $200 million, a mere pittance to any Silicon Valley billionaire, perhaps less than Elon Musk will dispense, one million dollars at a time, in his bid to induce Americans to vote for Donald Trump.
In other natural-gas news, there’s a move afoot to establish processing and transport facilities to ensure that a prodigious supply of liquified natural gas (LNG) gets from gas field to market as expeditiously as possible. Why? It’s the same reason we’re seeing a potential renaissance in nuclear power and nearly every other source of energy that can feed the enormous electricity demands of datacenters hosting AI processing. Whatever else genAI and its aspiring progeny, artificial general intelligence (AGI) ultimately achieves, they already qualify as depraved electricity fiends.
Tech's Energy Profligacy
Of course, they aren’t alone in their energy addiction. Without electricity, everything in our modern world would grind to a shuddering halt. We would have no technology industry without energy, certainly no genAI, which inhales mountains of cash and consumes vast amounts of electricity to run at scale. Still, as long as investors and corporations believe that AI is the key to untold fortunes and earthly power – admittedly, Musk and few others of his ilk are looking a little further afield than our clapped-out planet – nothing will impede or otherwise slow their pursuit of AI riches.
What’s that you say? You object that AI is a profligate energy hog? No, the AI ecosystem replies, the problem isn’t AI; the problem is an insufficient supply of electricity. They contend that we cannot and should not curb our AI investments. Instead, we must find more fuel to power the journey to a new tomorrow. That’s exactly what’s happening now. We will find more energy because limitless energy is a prerequisite for the continued development of AI.
No stone or fossil will remain unturned in the search for more energy. Further, no energy will be wasted. (Well, actually, some of it will be wasted, but not in the same way it was wasted before.) We certainly cannot afford to simply burn off natural gas, as we’d been doing as a matter of course in prior years. No, now natural gas will be brought to market, even, at least initially, at considerable expense. The fact is, none of the relatively untapped energy projects – renewable, nuclear, oil and gas, hydrogen, and whatever else – will be cheap or easy, but they’ll all be necessary as long as AI continues to require electricity in supersized bulk quantities. We all know what desperate times necessitate, and companies chasing that next trillion in valuation are nothing if not desperate.
For LNG, the prospects are bright, so effulgent that some observers suggest they might be too bright. According to a report from RBC Capital, as recounted by CNBC, LNG could become too much of a good thing, though AI purveyors and datacenter owners and operators certainly won’t complain. Here’s a salient extract from the CNBC report:
The biggest influx of liquefied natural gas, or LNG, supply is coming online and it will transform the global market, bringing about wide and enduring effects, said RBC Capital Markets.
"A wave of new LNG supply —the biggest yet— is set to reshape the global market in the coming years, with broader implications than prior growth given increasing inter-linkages between regional gas markets following the Russia-Ukraine conflict," analysts from the investment bank wrote in a note.
The supply injection is likely to thrust the market into an extended period of oversupply by the end of 2026, which will remain until 2030, with prices possibly moving below double digits, analysts such as RBC's Anan Dhanani have projected.
One person’s risk is another’s opportunity, and such is the case in the LNG space. As a result, the push and pull of dynamic supply and demand can result in a whipsaw effect within the near-term horizon of a couple years. The CBNC article posits that supply is likely to outstrip demand, constraining suppliers’ pricing and profit margins:
Throughout the year, a growing chorus of analysts have warned that tepid demand growth coupled with looming waves of export capacity could lead to a massively oversupplied market. As a stream of planned infrastructure continues to flood the market, it’s unclear if demand will increase to absorb each wave.
No Limit to the Demand Curve
I beg to differ. The technology industry, now that it has moved to the front of the economic bus and wrested the steering wheel out of the sclerotic hands of the old economy, can always be counted on for notorious profligacy. Nothing exceeds like excess, and we can depend on Big Tech's irrepressible demand to sop up any surplus energy supply and then politely ask for more.
If AI remains in commercial vogue, we already know that energy demand will grow steadily, supplied by whatever sources can readily and consistently meet the need. Yes, the hyperscalers will attempt to adhere to sustainability objectives, and their preferences will factor into their ultimate mix of energy sources well into the future; but nearly everything, including fossil fuels, will be tapped in a headlong sprint-cum-marathon to establish and maintain AI market expansion. Meanwhile, everybody else – all other industries and consumers – will also require energy, likely to a greater degree than they did in the past. That’s why it’s difficult to envision a future where energy demand slackens.
As always, of course, contingencies abound, further complicating any effort to corner the prediction markets. Even as the technology industry’s hunger for energy grows unabated, the world beyond technology remains subject to geopolitical complications and disorders.
The ongoing war in Ukraine means that Europe increasingly must find recourse to non-Russian sources of oil and gas, even as the continent also pursues renewables and nuclear energy with redoubled vigor. Similarly, as major conflict threatens to unfold on other fronts, such as the Middle East and Southeast Asia, it’s impossible to say exactly how energy-market dynamics will be affected. What we do know, however, is that more energy will be required, in vast quantities, because China is also pursuing AI, including datacenter buildouts at scale, and even the oil-rich Gulf States are investing in and trying to attract big-ticket AI ventures.
What it all means is that, failing some major breakthroughs that allow next-generation technologies to become abstemious consumers of electricity, we will experience no shortage of demand for all forms of energy, including LNG. Demand, in fact, is the only certainty. Sure, supply could outstrip demand for a time, as RBC Capital forecasts, but what we’ve learned from the technology industry is that the irrepressible hunger for more energy can never be fully satisfied. The technology beast will always need more fuel to power it toward the rainbow on the next horizon.
With technology finally assuming its role as king and not just kingmaker, energy supply might wax and wane in relation to demand, but the demand is certain to persist. Later in the CNBC article, pundits hold forth on what they believe they know today while conceding what they don’t know about the future. To wit:
There are other looming challenges to the LNG sector that could affect global markets. The 2024-25 Northern Hemisphere winter is in sight and existing contracts of Russian gas deliveries to Europe through Ukraine are set to expire at the end of 2024, the International Energy Agency pointed out.
"This could mean an end to all piped gas deliveries to Europe from Russia through Ukraine," the IEA wrote in a recent note. "This in turn would require higher LNG imports into Europe next year, resulting in a tighter global gas balance."
When it comes to energy supply in an increasingly technology-driven world, there’s no such thing as enough.